Silver Enterprises has acquired All Gold Mining in a merger transaction. The pre-merger balance sheet for Silver Enterprises has current assets of $1,500, other assets of $400, net fixed assets of $2,300, current liabilities of $1,000, long-term debt of $500 and owners' equity of $,2700. The pre-merger balance sheet for All Gold Mining shows current assets of $600, other assets of $210, net fixed assets of $1,600, current liabilities of $500, and equity of $1,910. Assume the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining's fixed assets is $2,900; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $4,000 in new long-term debt to finance the acquisition. The post-merger balance sheet will reflect goodwill of ________ and total equity of ________.
A) $640; $2,700
B) $790; $4,610
C) $790; $2,700
D) $890; $4,610
E) $890; $2,700

Question

Quizplus · Accepted Answer

To find the goodwill, we need to find the price paid for the target company (All Gold Mining) and subtract the fair market value of its net assets. 
Price paid for All Gold Mining = market value of fixed assets ($2,900) + book value of current assets ($600) + book value of other assets ($210) - book value of current liabilities ($500) 
Price paid for All Gold Mining = $3,210

Fair value of All Gold Mining's net assets = current assets ($600) + other assets ($210) + net fixed assets ($2,900) - current liabilities ($500) 
Fair value of All Gold Mining's net assets = $3,210

Therefore, goodwill = price paid - fair value of net assets = $3,210 - $3,210 = $0

Next, we can calculate the new balances for the post-merger balance sheet:
Current assets = $1,500 + $600 = $2,100 
Other assets = $400 + $210 = $610 
Net fixed assets = $2,300 + $2,900 = $5,200 
Current liabilities = $1,000 + $500 = $1,500 
Long-term debt = $500 + $4,000 = $4,500 
Owners' equity = $2,700 + $1,910 = $4,610

Therefore, the post-merger balance sheet will reflect goodwill of $0 and total equity of $4,610.

Silver Enterprises Has Acquired All Gold Mining in a Merger